Duke Energy CEO wants pay-as-you-go construction

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Last Updated: Fri, Jul 05, 2013 13:45 hrs

The newly installed chief executive officer of Duke Energy Corp. wants to change how the utility is regulated in the Carolinas and Florida so that America's largest electric company can more easily pass along the cost of big power plants a little at a time.

The company's desire to get consumers to start paying for big-dollar projects with price tags that could run into the billions is high on the agenda of Duke Energy CEO Lynn Good, who stepped into the company's top job Monday. That's what she told a Wall Street analyst shortly after her hiring was announced two weeks ago.

Good told Sanford Bernstein analyst Hugh Wynn that her first priority is fully integrating the operations of former in-state rivals Duke Energy and Progress Energy, which Duke bought out in a deal that closed a year ago.

A second top goal is changing how the company charges for big projects in the states where Duke Energy has the bulk of its customers, Wynn wrote in a note to investors. North Carolina and Florida basically follow a build-now, collect-later process in which utilities must show regulators their costs and justify requested profit margins. The cost of new power plants can't be passed on to customers until construction is done and the power flows.

"She did refer specifically to this issue of backward-looking rate-making," Wynne said in an interview.

South Carolina is one of 10 states that allow the pay-as-you-go method of charging consumers for nuclear power plants and other large projects, according to the Nuclear Energy Institute.

Requests by The Associated Press over the past week to interview Good so she could clarify the statement were declined through spokesman Tom Williams, who said she wanted to focus on internal issues after her series of brief introductory interviews.

Good's comments about regulatory changes represented her long-range thinking and the company had not made any specific proposals, Williams said.

"We're still in the early stages of that." Williams said. "It's just something that she wants to look at."

Those who support charging consumers for plant construction while it's still under way say it reduces the overall price tag of a power plant because starting payments early in the multi-year process reduces financing costs, holding down the price consumers ultimately pay. Opponents argue allowing utilities to charge for construction work in progress shifts risk to ratepayers by forcing them to pay now for a plant that may not produce power for years, if ever.

Florida regulations bar utilities from billing customers for building costs or upgrades until generating facilities go into service, but a 2006 law made an exception for nuclear power plant construction. That allowed Raleigh-based Progress Energy to charge for upgrades to a shuttered nuclear plant at Crystal River near Tampa, Fla., and a planned new one for nearby Levy County.

Duke Energy, which later purchased Progress Energy, decided in February to close the damaged Crystal River plant, allowing it the possibility to earn a $50 million profit on the $500 million that customers already paid. Florida customers also paid $1.5 billion for the Levy plant. Duke could earn $150 million if that project is not built.

Florida lawmakers this year approved changes to that 2006 law, establishing new limits on how much utilities could collect while developing nuclear-power plants and requiring state regulators to sign off on fees again after progress reaches certain stages benchmarks.

Jim Rogers, Good's predecessor as head of Duke Energy, urged North Carolina legislators for years to allow utilities to add nuclear plant financing costs to electricity rates, subject to a streamlined review by the state regulators.

North Carolina now allows consumers to be charged for major power plants while construction work is still in progress, but as part of a regulatory review of the company's costs that can take months when the utility requests a rate increase.

Duke Energy would rather avoid the examination of its costs and simply seek clearance to recover construction costs, said Robert Gruber, who recently retired as executive director of the North Carolina Utilities Commission's public staff. The office represents consumer interests before the regulatory panel. Gruber said the utility would like it even better if state law allowed that unfinished power plant to be considered an asset on which the company could tack on approved profit margin.

"I kind of was hoping that issue had sort of died on the vine," Gruber said.

Charlotte-based Duke Energy serves 7.2 million customers in the Carolinas, Florida, Kentucky, Indiana and Ohio. It is the largest U.S. utility as measured by number of customers and market value.

Like many U.S. utilities, Duke sees a future of restricted growth in electricity demand as homes, buildings, devices and appliances become more efficient. Good said last month she wants to find ways to keep company profits rising by looking for opportunities to cut costs and grow the company even without rising electricity sales.

Regulators in May approved a 7.5 percent average increase over two years for about 1.3 million customers of the former Progress Energy. The new rates will cost consumers an extra $326 million over the next two years, but allow the company to recoup some of the $11 billion invested since Progress Energy's last rate increase in 1987.

The state utilities commission opens hearings Monday that will determine whether regulators allow the company's operating subsidiary for the state's western half, Duke Energy Carolinas, a rate hike of more than $200 million a year and a 10.2 percent return on equity, a measure of profit.